Jump to content
rockwood

Raising finance........what would you do?!

Recommended Posts

Hey guys,

Really struggling to work out my plan of attack with regards to raising funds to get started in this; I keep floating back and forth from one to another. Here's the story:

We have £210k-£220k equity in our house with a current LTV of 35% and thus a very low mortgage of £340.

Idea 1:

Sell house to release ALL the equity (of course minus fees), rent somewhere else and channel all the money into developing our property business. Upside is that we would have more of our own cash to fund things, meaning that the cost of financing projects would be less so we can maximise profit, or perhaps we would be able to get involved with more projects. Downside, we would lose any further capital appreciation in this house (area is Bristol, which has good appreciation, and the property fundamentals are very good), and would be increasing our living costs by renting (rent is approx £1000k/mth where we are, £660 more than our monthly mortgage). A further downside would be the hassle/cost of trying to sell which would eat into our pot.

Idea 2:

Convert house to BTL at 75% LTV, although this is dependent on stress testing criteria etc, rent it out for a net cashflow of around £500-£600/mth, whilst being able to release SOME of the equity (maybe £100k-£120k, depending on lending criteria). We would again need to rent somewhere. Upside is that we of course get to keep the capital appreciation, we convert our home into an income-producing asset, and it is less hassle to sort out than selling. We would still need to rent elsewhere, but given the cashflow, we would roughly break even on living costs. The only downside I see to this is that we would have to leave around £100k of our money in the house, giving us less to play with for developing the business and would therefore make us more reliant on raising finance; this may make financing more expensive (thus diluting profits) and restrict the amount of projects we can do. Furthermore, it would be a BTL in a personal name, so then there are the tax implications (although based on how things look for us, I don't think this will make a huge difference really).

Idea 3:

Same as idea 2 but with first selling the house to our LTD company. Upside is the tax relief, although as I said, this is unlikely to make too much of a difference for us on the one property. Downside is SDLT which would cost £14k, not to mention the fees etc. If Boris switches SDLT to the seller as he proposes, then this may work but would still cost £5k plus fees, so currently not in love with this idea at the moment (but would be worth considering for inheritance tax protection in the future!).

Idea 4:

Forget trying to use my own money completely and try to raise finance through JVing and private finance etc. Upsides are of course infinite ROI with respect to money, we get to keep the house and can then chose to rent it out or not, downsides are that it is riskier, much more expensive (much higher profit dilution) and I'm not sure we will find people to JV with when we have no "skin in the game" ourselves, and no experience!!!

 

Lengthy post....sorry! Not asking for financial advice, just wondering what opinions you guys have on the subject!!

Thanks

RW

Share this post


Link to post
Share on other sites

Hey, for a bit of context, what do you plan to do if you do release all or some of the equity? 

Secondly, do you actually want to move? If not, then you've also got option 5...stay in your house with a residential mortgage, and apply for additional lending /RM to another provider which would also allow you to release the equity (potentially up to 90/95% even depending on your needs). Granted this would likely mean the extra funds are raised on C&I rather than I.O but if you are planning on using the equity for a deposit (or multiple deposits) on standard Btls then this could be a valid strategy too.

 

Share this post


Link to post
Share on other sites

Thanks Matt!

The plan with the money is to primarily operate a BRR 2yr hold strategy, although some of these may turn into flips. Not got the finer detail yet, and some of it may have to happen organically as we operate, depending on how quick a property can be sold, and whether we can get enough of my cash out of a project etc. Also looking at adding a property sourcing stream to it, although I have some concerns about this and will put up a separate post!!!

To be honest, we're not attached to the idea of staying here, especially as at the moment, we have to commute 6 miles each way to take the kids to school!!! Thanks for the option 5 suggestion. That could also work but the sticking point is that we wouldn't be able to get a mortgage for a capital and interest repayment on anything higher than what we already have due to not meeting the income requirements.

Share this post


Link to post
Share on other sites

 

8 hours ago, rockwood said:

To be honest, we're not attached to the idea of staying here, especially as at the moment, we have to commute 6 miles each way to take the kids to school!!! Thanks for the option 5 suggestion. That could also work but the sticking point is that we wouldn't be able to get a mortgage for a capital and interest repayment on anything higher than what we already have due to not meeting the income requirements. 

On a house price higher than £300k? Or on the existing size of the mortgage? If the former maybe Option #6 - sell and buy elsewhere with a higher LTV on the home. Releasing up to £180k to use as a pot. Although I'm guessing closer to school is more expensive?

And hi from Bristol too!

Share this post


Link to post
Share on other sites

Hi Rockwool

Do you have a 'burning platform' here? In other words, is there a desperate rush that requires a drastic solution? The answer to that will make a big difference to what you do. Also, as Matt has said...what is the context...what are your goals and by when for example?

If it were me, I would be considering the additional points:

1. Rental affordability - you raised affordability with your mortgage, but it also applies with renting. Typically, a landlord/agent will consider a max rent of 40% of your net pay.

2. Opportunity cost - what you have to give up to get the funds; you already mention capital growth. There is also a 'cost of financing' equivalent with your option 1 as you will pay £660 in incremental housing costs (rent) in return for c£210k in funds raised. That's an effective cost of financing at 3.8%. That's cheap compared to bridging finance, just over par compared to a BTL mortgage and possibly a reasonable amount above par compared to a resi mortgage. The resi mortgage route seems closed though anyway, so compared to BTL it comparable BUT you lose the capital growth, which makes it expensive and compared to bridging it is cheap but you also lose the capital growth, which makes it closer. A similar argument applies to the convert to BTL and rent, which I am sure you can work through.

3. Using your equity as security - you have c£210k in equity, which you could use as security to a lender. There are some institutional lenders that will advance on your home for a property project on a short-term bridging basis (it is a regulated transaction, so not that many can). Alternatively, a private lender might do likewise. This means you can offer second charge security if the existing resi loan is left in place or even a first charge if the resi loan is paid off at the same time.

4. Lending options - put simply, you have fewer lenders open to you when you don't own your own home. However, there are still quite a lot open to you, especially when you own at least 1 rental property, so it's not a killer.

5. Taxation - this is a consideration as you have identified. Interest inside a company is a business-deductible expense, whereas individually it gets more complex as you identify. If you are lower rate taxpayers, it won't change too much. Equally, PPR relief and your annual capital gains exemptions are a way to improve your net after-tax position ;) 

6. Transaction costs - the more 'transactions' you do e.g. buy, sell, finance, refinance, etc. the higher your transactions costs. In property, transaction costs are relatively high at 2% to 5% depending, so keep this in mind too. If it costs 5% to raise the funds, then factor this into your numbers on the other end.

So, more to consider (sorry), but what you do needs to be in context to what you are looking to achieve and by when and whether you do have the 'burning platform' or not.

Best

Richard


Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

Share this post


Link to post
Share on other sites

I would be very wary of giving up your own home in order to finance any project. If it all goes pear shaped you & your family need to have somewhere to live. Putting yourself in rented accommodation puts you at the whim of another person & you lose all control over if & when you are asked to move. Obviously you have children, so you should consider the effects on them.

I would either remortgage the residential property to release capital to start your venture or move to another house that suits you better with a bigger mortgage and release capital that way

Remember, your kids are only going to get bigger and so need more space, and will get closer to exams and need stability in their education. Do not put their futures at risk for your dream! I really believe you should prioritise your family's home first and be certain you can keep the roof over your heads come what may.

Good luck.

Share this post


Link to post
Share on other sites
On 8/14/2019 at 8:49 PM, henry g said:

 

On a house price higher than £300k? Or on the existing size of the mortgage? If the former maybe Option #6 - sell and buy elsewhere with a higher LTV on the home. Releasing up to £180k to use as a pot. Although I'm guessing closer to school is more expensive?

And hi from Bristol too!

Hi! Nice to see a fellow Bristolian here! Actually, I'm not Bristolian as I'm from London orignially, but been here 16 years and absolutely love Bristol, and my kids are Bristolian born so that makes me honourary I guess! 

Prices near the school are pretty much comparible, so our sticking point is that we are currently maxed out wrt income multiples (my self-employed wage not yet valid!), so can't increase LTV. So the only way to release the money would be to sell and rent elsewhere, or rent out this house and then rent elsewhere. Either way, it involves renting.

Share this post


Link to post
Share on other sites
On 8/15/2019 at 7:56 AM, richard brown said:

Hi Rockwool

Do you have a 'burning platform' here? In other words, is there a desperate rush that requires a drastic solution? The answer to that will make a big difference to what you do. Also, as Matt has said...what is the context...what are your goals and by when for example?

If it were me, I would be considering the additional points:

1. Rental affordability - you raised affordability with your mortgage, but it also applies with renting. Typically, a landlord/agent will consider a max rent of 40% of your net pay.

2. Opportunity cost - what you have to give up to get the funds; you already mention capital growth. There is also a 'cost of financing' equivalent with your option 1 as you will pay £660 in incremental housing costs (rent) in return for c£210k in funds raised. That's an effective cost of financing at 3.8%. That's cheap compared to bridging finance, just over par compared to a BTL mortgage and possibly a reasonable amount above par compared to a resi mortgage. The resi mortgage route seems closed though anyway, so compared to BTL it comparable BUT you lose the capital growth, which makes it expensive and compared to bridging it is cheap but you also lose the capital growth, which makes it closer. A similar argument applies to the convert to BTL and rent, which I am sure you can work through.

3. Using your equity as security - you have c£210k in equity, which you could use as security to a lender. There are some institutional lenders that will advance on your home for a property project on a short-term bridging basis (it is a regulated transaction, so not that many can). Alternatively, a private lender might do likewise. This means you can offer second charge security if the existing resi loan is left in place or even a first charge if the resi loan is paid off at the same time.

4. Lending options - put simply, you have fewer lenders open to you when you don't own your own home. However, there are still quite a lot open to you, especially when you own at least 1 rental property, so it's not a killer.

5. Taxation - this is a consideration as you have identified. Interest inside a company is a business-deductible expense, whereas individually it gets more complex as you identify. If you are lower rate taxpayers, it won't change too much. Equally, PPR relief and your annual capital gains exemptions are a way to improve your net after-tax position ;) 

6. Transaction costs - the more 'transactions' you do e.g. buy, sell, finance, refinance, etc. the higher your transactions costs. In property, transaction costs are relatively high at 2% to 5% depending, so keep this in mind too. If it costs 5% to raise the funds, then factor this into your numbers on the other end.

So, more to consider (sorry), but what you do needs to be in context to what you are looking to achieve and by when and whether you do have the 'burning platform' or not.

Best

Richard

Thanks Richard!

Ok more food for thought, as you always provide!

I guess my burning platform is just that I want to start the property journey and feel like whilst owning a home with lots of equity is great, that equity is not working for us. I have been giving a lot of thought to my initial Idea 2 (convert to BTL), because by doing so, we can release money and have the property still for capital growth, which feels like the best solution. Renting is more of a temp solution, but at least we will be more or less breaking even with our living costs. Wasn't aware of such a tight rental affordability though! Thanks for highlighting that! That's another reason for Idea 2 as our rent from the house would surely be classed as income, which would ensure that we would be ok under the 40% net pay criteria.......if the house is in my wife's name, is there anything stopping her from us saying that the rental income is mine, for the sake of using my tax allowance? Or does it have to belong to the person whose name the house is in?!

Another point that you highlighted that I have looked at previous using the home as security. I was quickly put off this idea because it felt like a risk that we wouldn't be fully in control of and worst case, we could be made to sell the house anyway which could get messy. Plus higher fees etc.

Been thinking more about my Idea 4 (JVing so as not to need any money). I know I mentioned the downsides of this approach, but have been thinking more and more about a profit split approach..........we do all the work, someone else simply fronts the money and there is no interest to pay as we would split everything 50/50. What are the best ways of finding these kinds of investors, and how do you go about establishing trust enough (as well as setting up the legals for full protection for both parties) to have someone work with you on this basis, despite lack of experience? I say lack of experience, however I have fully refurbed my own property (the house this thread is about!) and also have worked in the trade as a plumber, so I am literate with regards to building works etc. If we could at least start running projects on that basis, then that would be a great place to start I think!

Thanks again!

 

 

 

Share this post


Link to post
Share on other sites
7 hours ago, julia urquhart said:

I would be very wary of giving up your own home in order to finance any project. If it all goes pear shaped you & your family need to have somewhere to live. Putting yourself in rented accommodation puts you at the whim of another person & you lose all control over if & when you are asked to move. Obviously you have children, so you should consider the effects on them.

I would either remortgage the residential property to release capital to start your venture or move to another house that suits you better with a bigger mortgage and release capital that way

Remember, your kids are only going to get bigger and so need more space, and will get closer to exams and need stability in their education. Do not put their futures at risk for your dream! I really believe you should prioritise your family's home first and be certain you can keep the roof over your heads come what may.

Good luck.

Thanks Julia,

I do see your point here and think I have put the idea of completely selling up to bed, for the reasons you mention, as well as issues relating to rental affordability, as Richard mentioned. I'm not too worried about the risks of rental accommodation as we would still have our house as a back-up, and furthermore, we would have some protection due to the abolishment of Article 21. Renting would only a temp solution.

Share this post


Link to post
Share on other sites

Another, perhaps let’s palatable, option would be to wait.  You mention just going self employed and not being able to use that income.  Set in motion a plan so that in the next couple of years you build up a sum of money from your business and any other means.  Consider how much that will realistically be and research areas and properties where you could make that work.  Start slow and build up from there.

Personally, selling my home and renting sounds like too much upheaval for the uncertainty.  Or even renting my home and moving somewhere else.

Could you add value to your current home?  Could you add a loft room that could be let out? On the rent a room scheme you make approx 8k tax free per year.

I don’t know your situation, but again if it were me, I’d be wanting a rainy day fund before thinking about investing.

Share this post


Link to post
Share on other sites

Hi

i have been in a similar position - self employed for 2 years. I got consent to let on my current house and this allowed me to get a second residential mortgage up north with just 10% deposit. I used habito broker Halifax mortgage - painful process but they took 1 years accounting data. Now decided to sell main home if I can because we wouldn’t be coming back anyway and I want the funds to build up portfolio before I go to jv lending model. If it doesn’t sell will get best btl I can but hampers development plans! It’s tricky - capital growth is never guaranteed but 10-20 years likely to be good if fundamentals are there ? Not sure there’s a clear right answer - my burning platform is flexible working hours as I have a young child! 

Share this post


Link to post
Share on other sites

Hi Rockwood

OK, so as a husband and wife, you can choose to split your rental income as you wish simply by notifying HMRC, so if you want/need it all (or most of it) to boost your personal income, that's an easy fix.

Now, I am going to say something that many will disagree with...and this is completely to be expected when you read it. To be a 1%er, you need to listen to 1%ers and not 99%ers. I want you to think about that a LOT...

So, for example...to the 1%, they tend to go all-in...at least, to begin with. Personally, until fairly recently, I did not have a home that I owned, but now I have three! I sacrificed the comfort and security of 'owning' my own home and rented instead, using 'geo-arbitrage' in my favour and also using my capital and equity as investment capital for my property business. Anyway, that's just a 1% thought for you, as said. The 99%ers will tell you not to do this...and it can all go horribly wrong to be fair, so choose wisely ;) 

If you really want to attract a JV partner, consider merging your own-home-to-BTL idea with raising funds and providing security in doing so at the same time. You could offer a fixed rate of return, first-charge security on an income-producing asset and then potentially also a profit share on top (not necessarily 50%) based on a new project. There should be plenty of takers with that sort of 'hybrid, secured approach' I expect, as long as you and the project you invest in also make sense.

Message me if you want some suggestions as to where to find such people and how to go about it but you could start with friends and family, business acquaintances and then 'the property circuit'. Remember, it's all about positioning yourself: http://www.thepropertyvoice.net/soundbite-6-things-to-consider-when-it-comes-to-joint-venture-discussions-in-property/ and http://www.thepropertyvoice.net/soundbite-10-of-the-more-unexpected-places-to-find-property-deals-and-investment-partners/

Best

Richard


Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

Share this post


Link to post
Share on other sites
On 8/17/2019 at 10:01 PM, richard brown said:

Hi Rockwood

OK, so as a husband and wife, you can choose to split your rental income as you wish simply by notifying HMRC, so if you want/need it all (or most of it) to boost your personal income, that's an easy fix.

Now, I am going to say something that many will disagree with...and this is completely to be expected when you read it. To be a 1%er, you need to listen to 1%ers and not 99%ers. I want you to think about that a LOT...

So, for example...to the 1%, they tend to go all-in...at least, to begin with. Personally, until fairly recently, I did not have a home that I owned, but now I have three! I sacrificed the comfort and security of 'owning' my own home and rented instead, using 'geo-arbitrage' in my favour and also using my capital and equity as investment capital for my property business. Anyway, that's just a 1% thought for you, as said. The 99%ers will tell you not to do this...and it can all go horribly wrong to be fair, so choose wisely ;) 

If you really want to attract a JV partner, consider merging your own-home-to-BTL idea with raising funds and providing security in doing so at the same time. You could offer a fixed rate of return, first-charge security on an income-producing asset and then potentially also a profit share on top (not necessarily 50%) based on a new project. There should be plenty of takers with that sort of 'hybrid, secured approach' I expect, as long as you and the project you invest in also make sense.

Message me if you want some suggestions as to where to find such people and how to go about it but you could start with friends and family, business acquaintances and then 'the property circuit'. Remember, it's all about positioning yourself: http://www.thepropertyvoice.net/soundbite-6-things-to-consider-when-it-comes-to-joint-venture-discussions-in-property/ and http://www.thepropertyvoice.net/soundbite-10-of-the-more-unexpected-places-to-find-property-deals-and-investment-partners/

Best

Richard

Inspired once again Richard......thanks!

I do always try to think like a 1%er, the problem I have is that most of the time, I can't determine whether an idea I have is a "1%er idea" or just me being a bit crazy! Sometimes I feel like there is a fine line between the two that I'm not experienced enough to determine yet!!

What would be the best method to get in contact with you? I have tried to message you on here but it wouldn't let me for some reason! I also have some questions about some of the services advertised on your website that have interested me. 

Thanks!

Share this post


Link to post
Share on other sites

Only a 1%er can really think like a 1%er, although we can learn a lot about 1%ers by studying them as well ;)

Strange that you cannot reach me here, although my inbox was nearing storage capacity as I recall (will check into that, so thanks for alerting me). Meanwhile, you can try admin@thepropertyvoice.net as the first port of call...please reference our various threads and it will find it's way to me...


Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×